The Thrift Savings Plan (TSP) is a retirement plan offered for active members of the armed services. Despite having some of the same advantages of a 401k or IRA, less than 50% of active duty service members use it, according to Doug Nordman, U.S. Navy retiree and author of "The Military Guide To Financial Independence And Retirement."
Here’s what you need to know about the TSP and its offerings:
Any of the minor drawbacks of the TSP—like inability to invest in real estate or commodities—are far outweighed by its biggest advantage: extremely low fees.
The average net expenses charged for the majority of TSP funds in 2014 were .029% (29 cents per $1,000 invested); an expense ratio of 1% or less is considered low for an index fund. The miniscule expenses involved make a huge difference and really add up, considering you’ll be invested in the fund for years to come.
There is also a fair amount of flexibility in selecting your investment strategy as well as deciding how you want to contribute funds—whether taxed or untaxed—so you can customize around your situation and future objectives.
How it Works
When choosing to enroll, uniformed service members elect a percentage of pay to be automatically deducted from each paycheck. The default contribution is 3% unless otherwise indicated, and the selected percentage automatically renews each year until the participant elects to modify it.
The maximum amount you can contribute is $18,000 per year. However, if you are receiving tax-exempt compensation, like combat pay, you may exceed the maximum contribution during that year if contributing this tax-exempt pay.
You also must choose your tax treatment, much like when choosing between a Traditional or Roth IRA. With the Traditional TSP, you contribute with pre-tax money out of your paycheck and defer taxes on earnings until you withdraw funds later in life. In this scenario, less money is taken out of your paycheck now, and taxes are paid later.
With the Roth TSP, you pay taxes now and contribute after-tax money to the fund so that you can withdraw earnings tax-free later in life, provided you meet the IRS requirements that you’ve been invested for a minimum of five years and are at least 59 ½ years old.
Nordman recommends the Roth TSP of the two, explaining: “What we’ve seen with today’s tax code is that most service members are very lightly taxed, and it makes a lot more sense to pay taxes now than to do it later.”
Deciding on Your Investment
When looking at how much to contribute, Nordman suggests that you figure out your asset allocation plan first, and then base your contribution percentage on that. “It's important for new investors to put some thought into their asset allocation so that they have the self-confidence (and the commitment) to stick with their plan no matter how volatile the stock market gets,” he says.
Once you decide how much you want to contribute, you get to pick from 10 different funds offered through the TSP. Four of the funds, the F, C, S and I, are passively managed index funds, each mimicking a different type of index. The G fund is guaranteed to not lose money, and has the goal of acquiring wealth slightly above inflation—essentially like a bond fund.
The other five are “Lifecycle Funds” or “L Funds,” which employ a mixture of all the other funds with a set retirement age or time horizon in mind. These funds “invest in an appropriate mix of the G, F, C, S and I Funds for a particular time horizon, or target retirement date. The investment mix of each L Fund becomes more conservative as its target date approaches,” according to TSP.gov.
The F and G funds will have more modest returns than the others, but if you have no time to deal with asset allocation or aren’t very motivated to actively invest, these funds are a great way to put money aside for the future without doing much work. Ultimately, it’s up to you to decide what is best for you based on your risk tolerance, time horizon, and end goal.